By Dean Foust September 30, 2009

When Ken Lewis took the helm of Bank of America (BAC) in early 2001, the Mississippi native quickly made clear that he would change the culture from the one that prevailed under his predecessor, Hugh McColl Jr. While McColl had proved to be the consummate dealmaker—transforming a sleepy North Carolina bank into the nation’s second largest at the time—Lewis felt he was inheriting a bank that had become too addicted to mergers for its growth, and had largely failed to deliver on the potential from all those deals.

As he made the rounds on Wall Street, Lewis assured investors that the era of big mergers was over—and that Bank of America could prosper simply by mining more growth out of the 30 million households that already had at least one account with the bank. And back at BofA’s headquarters, Lewis made it clear to McColl’s old management team that they had to start cross-selling more products to existing customers—or else. Ken is big on discipline. He says repeatedly: ‘No excuses,’ Edward J. Brown, a former top BofA executive, told BusinessWeek at the time.

But it took Lewis only a couple of years to learn what McColl already knew—that cross-selling was impossible when most of its customers didn’t trust a bank to handle much more than a checking account or car loan. With internal growth hard to come by, Lewis got back into the deal game—and in time began arranging megamergers that would have made even McColl blush.

Merrill Too Much to Handle In the end, that addiction to dealmaking proved to be Lewis’ undoing. The same executive who told BusinessWeek in 2002 that he was highly skeptical that I’ll ever think an investment bank is worth what they think it’s worth couldn’t restrain himself when the opportunity presented itself last year to take over venerable Merrill Lynch, even as it was reeling from its fateful foray into subprime lending. But within mere months, it was clear that his acquisition of Merrill—coming on the heels of BofA’s deal for Countrywide Financial, the equally troubled mortgage giant—was far more than Lewis could manage. And after a tumultuous year in which he endured attacks from shareholders, lawmakers, and regulators, on Sept. 30 Lewis abruptly announced his plans to retire at the end of the year.

In his announcement, the 62-year-old Lewis tried to put the best face on the situation, noting that the Merrill Lynch and Countrywide integrations are on track and returning value already. Lewis also claimed that BofA had more management depth than ever, and was in position to begin repaying the government the investment it made in the bank during its darkest hours last winter. Bank of America is well-positioned to meet the continuing challenges of the economy and markets, he said in a statement.

While Lewis offered no public explanation for his decision to step down a full year earlier than expected, one source close to the bank said that Lewis had grown weary of the political, legal, and regulatory attacks that he felt had made it difficult to run the bank. And with regulators having prevailed in forcing a shakeup of BofA’s board, Lewis found himself surrounded by a room full of outsiders with little loyalty to their beleaguered CEO. While BofA’s board didn’t announce a successor—a move certainly out of deference to Lewis—the potential list of internal successors includes Brian Moynihan, who oversees the bank’s consumer and small business banking unit; Sallie Krawcheck, the head of wealth management; global markets chief Thomas Montag; and Chief Financial Officer Joe L. Price.

Bank’s Problems Won’t Disappear If BofA’s board fills the job internally, analysts are betting the task will fall to Moynihan, an attorney and former Fleet Financial executive whose recent rotation through a number of top jobs was viewed as an effort to ready him to succeed Lewis relatively soon. But regulators could similarly demand that BofA bring in a savvy outsider who isn’t as invested in the status quo as Moynihan might be. If regulators do go outside, one leading candidate would be Al de Molina, a former chief financial officer at BofA who now runs Ally Bank, the entity formerly known as GMAC Financial Services. While de Molina ruffled feathers recently by poaching some BofA executives, he was also revered by Wall Street investors for his financial savvy and his candor in discussing BofA’s prospects.

But if both Lewis and BofA’s board were hoping his exit would serve as a reset button for the bank, that won’t be the case. While bank executives have pressed their case with investors that those deals for Merrill, Countrywide, and before that MBNA and Fleet, could help BofA generate $30 billion in annual profits when the economy returns to normal, that day is still some ways off. While the mortgage refi boom is helping to sustain profits at the former Countrywide unit, the bank is still sitting on a mountain of foreclosed homes that it has held back to avoid revaluing the many other mortgages it holds in surrounding communities. What’s more, its credit-card portfolio is suffering rising delinquencies and its commercial real estate portfolio is also starting to come under pressure.

But for Lewis and the rest of the management team, its bigger problems lie on the legal front. Lewis is at the center of several government investigations into whether he and other top BofA executives violated securities laws by failing to alert the bank’s shareholders about unreported losses and executive bonuses at Merrill Lynch before they voted to approve the deal. In the months afterward, Lewis protested that he’d been bullied by top policymakers such as then-Treasury Secretary Henry Paulson to both hide the losses and to push ahead with the Merrill Lynch deal. Paulson and other regulators denied applying such pressure.

Cuomo: New York State Probe Will Go On That left Lewis in a no-win situation with many investors viewing BofA’s top executive as, at best, a patsy who allowed himself to be rolled by policymakers—and at worst, a liar. And while the bank thought its $33 million settlement with the Securities & Exchange Commission had closed the book on the controversy, the surprise decision by a federal judge to reject the settlement virtually forces the SEC to take the case to trial next year.

Lewis’ legal troubles don’t end there. BofA executives face similar probes by two state attorneys general, and one—New York’s Andrew Cuomo—quickly made clear that Lewis’ retirement wouldn’t change the likelihood that he will bring charges against BofA’s management. Ken Lewis’ decision to step down will have no impact on our continuing investigation, Cuomo said in a statement.

While it would be easy to portray Lewis as a victim of his blind ambition and hubris in pursuing the Countrywide and Merrill deals at the worst times, there are those who believe the executive is simply a victim of a political backlash that wasn’t deserved. The success of this bank is due to the brilliance of Ken Lewis as a visionary and tactician, Richard X. Bove, a veteran bank analyst for Rochdale Securities, wrote in a note to clients shortly after Lewis resigned. No other banker in this country can equal his achievements and yet every banker wishes s/he could. Yet despite his successes, he was torn from his post by politicians lacking any of Mr. Lewis’ skills and successes. One can only be amazed that our system of governance can be so flawed.

When Lewis took the reins in 2001, he felt that he had inherited deep animosity among Wall Street investors whose disdain for McColl’s serial dealmaking had blinded them to Bank of America’s potential. At the time, Dallas money manager R. Harold Schroeder recalled a 1996 meeting in which Lewis voiced his frustration over the degree to which the Street’s visceral dislike of McColl was coloring its views of the bank: Ken told me, ‘At some point, we have to separate the persona of the organization from the persona of the chairman.’ Eight years later, that will be the challenge confronting Bank of America’s next CEO, whoever that may be.